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Executives

Gary Fuges - Manager of IR

Tom Vadnais - CEO

Sam Paisley - CAO

Analysts

Mark Mahaney - Citi Investment Research

Youssef Squali - Jefferies & Co.

Terry Heath - Credit Suisse

Imran Khan - J.P. Morgan

Mark Bacurin - Robert W. Baird

Aaron Kessler - Piper Jaffray

Brian Pitz - Banc of America Securities

Christa Quarles - Thomas Weisel Partners

Eric Martinuzzi - Craig-Hallum

Mark May - Needham & Company

Chad Bartley - Pacific Crest

Sandeep Aggarwal - Oppenheimer & Co

Mayuresh Masurekar - CIBC World Markets

Robert Coolbrith - ThinkEquity Partners

Peter Kuechle - Frontier Capital

ValueClick, Inc. (VCLK) Q3 2007 Earnings Call November 1, 2007 4:30 PM ET

Operator

Good day. My name is Sarah and I will be your conference facilitator today. A replay of this call will be available by telephone beginning at 4:30 p.m. Pacific Time today and will be accessed through 10 p.m. Pacific Time on November 8, 2007. Thereafter, it can be accessed on ValueClick's website at www.valueclick.com or www.streetevents.com. Previously filed SEC filings can also be found on ValueClick's site.

All lines have been placed in a listen-only mode to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions).

At this time, I would like to turn the conference over to Mr. Gary Fuges, Manager of Investor Relations for ValueClick, Incorporated. Please go ahead, sir.

Gary Fuges

Thank you, Sarah. Good afternoon, and welcome to ValueClick's third quarter 2007 financial results conference call. On the call with me today are Tom Vadnais, Chief Executive Officer; and Sam Paisley, Chief Administrative Officer.

Today's call contains forward-looking statements that involve risks and uncertainties, including, but not limited to, trends and online advertising spending and estimates of future online performance based advertising. Actual results may differ materially from the results predicted and reported results should not be considered an indication of future performance.

Important factors which could cause actual results to differ materially from those expressed or implied in the forward-looking statements are detailed under the Risk Factors section and elsewhere in filings with the Securities and Exchange Commission made from time-to-time by ValueClick, including its annual report on Form 10-K filed on March 1, 2007, recent quarterly reports on Form 10-Q and current reports on Form 8-K.

Other factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements include, but are not limited to, the risk that the market demand for online advertising in general and performance based online advertising in particular will not grow as rapidly as predicted, and legislation and governmental regulation could negatively impact the company's performance. ValueClick undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

With that, I would like to turn the call over to Mr. Tom Vadnais, CEO of ValueClick. Tom?

Tom Vadnais

Thank you, Gary. Good afternoon, everyone, and thanks for joining us for our third quarter 2007 conference call. As you all know, on October 16th, we revised our Q3 and full year guidance as a result of continued softness in our lead gen business during Q3. Today, we will report our final Q3 results and Q4 outlook, which I am happy to say, are in line with our updated guidance.

Our third quarter revenue is at the high-end of the range we provided in our October 16th call. Our softness in the lead generation part of our Media business was primarily in the promotion-base segment that is related to the ongoing FTC investigation, which I will talk about in just a second. There was some spillover into the non-promotional segment of lead gen business. And this is because the advertisers generally use multiple types of lead gen offerings and when they shift their way from this type of advertising it can both those segments.

As you may recall, our revised guidance on October 16th, focused primarily on Q3 and Q4 revenue, we did not change our adjusted EBITDA or EPS guidance. Our focus on execution has enabled to us meet our original EPS and adjusted EBITDA guidance ranges for the third quarter. Before I give you a brief update on how our business units performed last quarter, I would like to update you on the ongoing FTC investigation regarding the lead gen business.

We are currently in active negotiations with the FTC staff, but these negotiations are in their preliminary stages. At this point we anticipate the likely outcome will be fine, the amount of which we did not believe will be material to the company's overall financial position.

In addition, we also anticipate a speculated injunction between ValueClick and the FTC. While the terms of the injunction are currently being negotiated, we believe that any stipulation entered into with the FTC will provide clear guidelines for our lead generation practices going forward, and we hope, will help establish clear set of standards for the entire industry. As always, we refer you to our quarterly report, which will be filed shortly for specific disclosures on this and other issues.

Now, I would like to give you a brief summary of our Q3 performance. Other than the lead gen segment, our other businesses have performed well all year. In Media, we continue to see strong growth and display advertising. With year-over-year growth, worldwide display ad revenue accelerated from 21% in 2Q '07 to 42% growth in 3Q '07. The network enjoyed continued revenue diversity along all pricing models.

Another growth driver was our patented behavioral targeting technology, which is gaining more traction with our advertising missions. Behavioral targeting revenue more than doubled from Q2 and more than tripled from the year ago period.

Regarding our ongoing efforts to maximize synergies between our business units, in Q3 we also began to explore ways to leverage MeziMedia's search expertise to drive traffic to our lead generation offers. Prior to the acquisition of Mezi, we were not using search as a traffic source for lead generation. It's only in the process, but I am encouraged by the synergy potential between lead gen and Mezi search capabilities. Other synergy opportunities between Mezi and ValueClick include leveraging the direct advertising relationships that exist across ValueClick to bring more business to the Mezi sites such as Smarter.com and CouponMountain.com.

In our Affiliate Marketing business, Commission Junction had another strong quarter of growth with continued success in winning and launching new clients. We believe we've added to our leading market share in the US over 2007 and the pipeline of potential new customers is strong. In the quarter, we launched creative services and advanced training services, and we are also seeing traction from an earlier initiative to leverage to Media segment for CJ Advertiser offers.

In our Technology segment, we also had another good quarter, with both growth and expanding margin. The profit enhancements we have made over the past year in both Mediaplex and Mediaplex System is going to continue to give traction going forward. The ability to track campaigns across multiple online channels and provide behavioral targeting capabilities differentiates our Mediaplex technology from the alternatives in the marketplace.

And finally, our Comparison Shopping segment had an exceptional quarter. PriceRunner Europe had a good quarter with pro forma organic year-over-year revenue growth of more than 30%. And MeziMedia in the US Comparison Shopping market was also stronger than expected.

So, with that brief overview of our business segments, I would like to now turn the call over to our Chief Administrative Officer, Sam Paisley for some details on our quarter and our updated guidance. Sam?

Sam Paisley

Thanks Tom. Before I discuss our financial results, I want to mention that third quarter 2007 results include two months activity from MeziMedia, which was acquired in July, 2007. In the third quarter of 2007 ValueClick generated revenue of $156.9 million, a 14% increase over Q3, 2006 revenue of $137.9 million. Organic growth, calculated assuming MeziMedia had been acquired at the beginning of both quarters, was approximately 11%.

Gross profit was $106.4 million for the third quarter of 2007, an increase of 7%, compared to gross profit of $99.2 million for Q3, 2006. Gross margin was 67.8% in the third quarter of 2007 compared to 71.9% in the third quarter of 2006. Gross margin decreased, primarily because of the reduction in mix of lead generation revenue from owned and operated promotional-based websites in the third quarter of 2007.

Operating expenses, excluding stock-based compensation and amortization expense, totaled $68.8 million, or 44% of revenue in the third quarter of 2007, compared to $65.9 million or 48% of revenue in Q3 2006.

Sales and marketing expenses were virtually flat on an absolute dollar basis in Q3 2007 versus 2006, due to the decline in advertising cost supporting owned and operated promotional sites. Stock-based compensation in aggregate was $4.6 million in the third quarter of 2007, compared to $3 million in 2006. This increase is primarily attributable to the higher fair value assigned to each option granted in 2007, compared to 2006. Resulting from the higher trading price of the company's common stock at the time in the 2007 grants and higher assumed volatility.

Amortization of intangible assets was approximately $6.7 million in third quarter of 2007, compared to $5.5 million in 2006. This increase is primarily due to the addition of new intangible assets from July 2007 acquisitions of MeziMedia. The company generated operating income of $26.3 million in Q3 2007, compared to $24.8 million in 2006. Operating margin was 16.8% compared to 18% in year-ago period.

Net interest income was $2.9 million for the third quarter of 2007, compared to $1.6 million in Q3 2006, due primarily to higher marketable securities balances and improved investment yields on our portfolio.

Income tax expense for Q3 2007 was $12.4 million, and the company's net effective income tax rate was 42.5% in the quarter. We anticipate a net effective income tax rate of 42.5% in Q4 2007, and a full year 2007 net effective income tax rate of 42%

These figures result in third quarter 2007 net income of $16.8 million, or $0.17 per share based on a weighted average number of 100.2 million diluted shares outstanding. This performance is at the high-end of our guidance range of $0.16-$0.17 per share.

Adjusted EBITDA was $40.1 million for the third quarter of 2007, compared to $35.6 million in the prior year. Adjusted EBITDA margin was 25.5% in Q3 of 2007, compared to 25.8% in the prior year.

The consolidated balance sheet as of September 30, 2007 remains strong with $251 million in cash, cash equivalents and marketable securities, $687 million in total stockholders' equity, and no long-term debt. Uses of cash in the quarter included $96.8 million in net cash related to the MeziMedia acquisition, and $44 million to repurchase $2.3 million shares as part of our share repurchase program. As of September 30, 2007 the company has approximately $56 million of authorization remaining on its share repurchase program.

Capital expenditures were approximately $1.4 million in Q3 2007.

I will now discuss the third quarter performance in each of our four worldwide business segments. Today's press release includes a table of segment level financial performance. Segment operating income excludes corporate expenses, amortization of intangibles and stock-based compensation.

Worldwide Media revenue was $85.6 million in the third quarter of 2007, compared to $98.4 million in Q3 2006. Strength in US and European Display Ad business was offset primarily by the weakness in the promotion-based business that Tom described earlier. Display media revenue growth was approximately 42% year-over-year in the quarter.

Media's gross margin was 59% compared to 67.8% in Q3 2006 and segment operating margin was 20.1% in the third quarter of 2007, compared to 24.8% in the year ago quarter. The reduction in gross margin resulted from a decrease in the mix of promotion-based revenue in 2007, which was offset by a decreased in advertising cost used to support related, owned and operated promotional sites.

The decrease in segment operating margin was primarily attributable to an increase in discretionary marketing spend in our display ad business and increased cost in the lead generation business associated with legal collections and consolidation activities. The integration of our lead generation businesses was completed during the quarter. So, Q3 results do not reflect the full cost savings associated with the integration.

Worldwide Comparison Shopping revenue increased more than 400% on a reported basis to $29.4 million in the third quarter of 2007. Primarily, due to strong PriceRunner, Europe performance and the inclusion of two months results of MeziMedia. Pro forma organic year-over-year revenue growth was 118%. Gross margin of 75.2% declined from 91.3% in 2006, due to an increased mix of distribution partner revenue. Segment operating margin increased to 22.3% compared to 10.9% in the year ago quarter, primarily due to the higher net operating margin of MeziMedia.

Worldwide Affiliate Marketing revenue increased 25% to $34.1 million in the third quarter 2007. Due to primarily to an increase in our number of customers and an increase in transactional volume associated with both new and existing customers. Gross margin of 79% declined from 81% in 2006, due primarily to the increase mix of search business. Segment income margin of 47.3% in the third quarter of 2007 declined only 40 basis points from 47.7% in 2006, because operating expense leverage from the growth in revenues significantly offset reduction in gross margin attributable to the increased mix of search business.

Worldwide Technology revenue increased 26% year-over-year to $8.2 million, due to growth in both the US and Europe. Gross margin of 83% expanded from 79% in 2006, and segment operating margin expanded to 42% in Q3 2007 from 29% in a prior year due to operating leverage associated with higher revenue. Based on our third quarter results and revised outlook for 2007, we are updating our guidance as follows.

For the fourth quarter of 2007 we expect revenue of approximately $172 million to $177 million. We expect adjusted EBITDA in the range of $42 million to $45 million. And we anticipate diluted net income per common share $0.17-$0.18, including stock-based compensation expense of approximately $0.03 per common share, based on an expected share count of approximately 100 million diluted shares outstanding.

For the full year 2007, we expect revenue of approximately $635 million- $640 million. We expect adjusted EBITDA in the range of $162 million- $165 million. We anticipate diluted net income per common share of $0.70- $0.71, including stock-based compensation expense of approximately $0.11 per common share, based on an expected share count of approximately 101 million diluted shares outstanding.

The full year 2007 guidance assumes approximately $25 million to $26 million in amortization of intangibles, $9 million- $10 million in depreciation, $18 million-$19 million of stock-based compensation, and net effective income tax rate of 42% and capital expenditures of $10 million- $11 million.

I will now turn the call back over to Tom for some closing comments.

Tom Vadnais

Thank you, Sam. I think what we should do now is just go straight to the Q&A session.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically today. (Operator Instructions). And our first question will come from Mark Mahaney with the Citi Investment Research.

Mark Mahaney - Citi Investment Research

Great, thank you, I would like to ask two quick questions, please. On the behavioral targeting initiatives or what you seeing in the marketplace, it looks like you are seeing very strong growth. I am sure that's off of small basis, but it's still strong. Are you specifically seeing advertisers willing to pay materially more for behaviorally targeted ads than for regular ads? And then secondly, it sounds like US and European display advertising as a whole seems relatively strong, could you peel that back a little bit? Are there particular verticals, particular industries where you are seeing greater than expected strength? Thank you very much.

Tom Vadnais

Mark, on your first question, and I will let Sam cover your second question. On behavioral targeting, it is a small base. Behavioral targeting it's a lot of conversation, but it’s still a very small piece of the revenue. So, we are glad to see it double and tipple in size, but it's not big number yet. But, hopefully it will be. And from a pricing standpoint it's not a huge uplift. I have to get you some exact numbers if you want those we can do that later. But, it's a nice feature and we think we've god leading edge technology and to the extent that we can continue to drive that, which I think we can, and grow it at a slight premium, I think it’s a good offering for us. Sam, I will let you try to respond on the segment issue on display.

Sam Paisley

Right, in terms of the drivers of the display growth side from general market factors, there is small amount of price lift though related to behavioral targeting and video. It's also true that we have initiatives working with some major publishers to help them in the monetization of their media supply and we have shifted a fair amount of inventory away from lead generation into display just to meet market demand. So, all those are factors that are explaining some of the growth in display in current year.

Mark Mahaney - Citi Investment Research

Thank you, Sam. Thank you, Tom.

Tom Vadnais

Thanks Mark.

Operator

Our next question will come from Youssef Squali.

Youssef Squali - Jefferies & Co.

Thank you very much. Youssef Squali. Two questions here as well. Sam in prior quarters you kind of helped to isolate for us the promotional revenues and then the [O&O] business. I was wondering if you could help go through that exercise for us again, just so that we can maybe extract some of these revenues that were at issue here. And second, as we look at '08, do we have any visibility into kind of how long it will take before we start getting those advertisers that pulled back because of the FTC issue. I think you talked resolving that issue. Have any, I guess, ideas to the timeline for that as well?

Sam Paisely

Let me -- do you want to go ahead and take those Tom?

Tom Vadnais

Go ahead, Sam.

Sam Paisely

I will try to answer the second question first. It's sort of a non-answer in that. Even though we have given a bit of a status on where we are engaged with the FTC, it's still a pending matter and we are not in any position to really predict exact timetables. And on the point of further clarification on the part of our business, is promotional lead generation owned and operated versus the total.

It is fair to say, that we suffered a more than anticipated decline in the promotional owned and operate revenue in the current period. In the third quarter, it was about $9 million decline over the second quarter and we are now at a point where overall lead generation in the company is ever so slightly less than 60% in total media revenue.

Youssef Squali - Jefferies & Co.

Okay, great. Thanks.

Operator

Our next question will come from Terry Heath with Credit Suisse

Terry Heath - Credit Suisse

Great. Thank you. I was wondering, just to kind of go back to some of the higher level stuff you have talked about before. If you can give us an idea for what kind of traction you are seeing in video based advertising? What percentage of your ad network is actually able to accept the video advertising that you are putting through it? And then What kind of demand relative to that supply that you are seeing from advertisers?

Tom Vadnais

Well, I will start that and Sam jump in as we go. It's getting more conversation than it is business at this point. That segment is, I think a directional one for the business, but not one that we are seeing significant volumes in or demand for at this point. Sam, you want to expand on that?

Sam Paisley

Yeah, the only thing I would elaborate on would be to say that it's a very small percentage of the total mix of ads that are occurring. And I think, I had also observed that the most recent eMarketer number seems to indicate that the original forecast on video ad serving in the US market for 2007 really wasn't revised, even though I think they saw the total growth in the US advertising markets being higher than their original forecast. It's still an area that in the future we are expecting good lift and promise from. But, I would agree with Tom it's not a major factor in the current year.

Tom Vadnais

Does that answer your question, Terry?

Terry Heath - Credit Suisse

That does. Thank you.

Operator

Our next question will come from Imran Khan with J.P. Morgan.

Imran Khan - J.P. Morgan

Yes. Hi, thank you for taking my questions. Two questions, number one is MeziMedia, in the past when you look at the Comparison Shopping, their performance was uneven and I was wondering what differentiate MeziMedia from other comparison shopping that we are seeing such a strong growth and we can think that growth is sustainable. And second question is, it seems like your display ad business is doing very well, considering some of the large cap Internet companies are trying to build their ad network in the display site. How defensible your display ad business is? Thank you.

Tom Vadnais

Let me understand the last part of your question, you said how…

Imran Khan - J.P. Morgan

Yes. So clearly, and I think if you look at recently Time Warner talked about creating Platform A, Yahoo! with their acquisitions of BlueLithium and trying to aggregate lot of traffic in the marketplace. So, trying to better understand as these companies are trying to effectively compete with you what, help us better understand that your differentiations that you think you can gain market share or maintain your market share? Thank you.

Tom Vadnais

All right. On the Mezi side, and Sam I will let you coming on the display side. Mezi's differentiation is there are leading edge technology and SEM side of their search. They have done an excellent job in developing their technology and it's been a great addition not only to our Comparison Shopping business, but as I mentioned in the earlier comments we can see synergies in other parts of our business too using the Mezi technology.

So that’s largely a technology answer there. Sam you want to comment on the display question.

Sam Paisley

Yeah, I think, one aspect that you should remember on the display side that even now there are new owners of certain businesses the leadership and the people that we’ve been competing against on the display side have been the same players for ever since ValueClick started to business in late 1990s.

So even though there is change in ownership and changes in leadership, the competition is essentially the same. So I’m not sure that the landscape has really changed. Some of the core aspects, I guess what’s fueling some of the new interest in networks have to do with both optimization and behavioral targeting capabilities.

And although, we haven’t necessarily been continuously beating the drum to tell you about our skills in that area, it’s absolutely true that we have patented behavioral targeting technology and we’ve had a very consistent focus on continuously improving our optimization capabilities. And that’s why one of the reason, we’ve been able to sustain ourselves in a leadership position in the display business.

Imran Khan - J.P. Morgan

Great thank you. That’s helpful.

Operator

Our next question will me come from Mark Bacurin with Robert W. Baird.

Mark Bacurin - Robert W. Baird

Hi good afternoon. I want to drill down on the Comparison Shopping Group little bit and understand the contribution from MeziMedia. I think going back and looking at my note, you guys have talked about MeziMedia had about $60 million of revenue in ‘06 and I think due to the first seven months it was roughly $43 million. So I am trying to understand the pretty significant contribution for what I believe is only at two months ad in Q3. So could you just break up for specifically what the MeziMedia contribution was in Q3?

Sam Paisley

It was around $20 million.

Mark Bacurin - Robert W. Baird

Is there a seasonal pattern to that that makes it higher in Q3 that seems high relative to if bigger could you confirm that $43 million was the number to the first seven months?

Sam Paisley

Yeah, I believe the number that was viewed by many people in the 8-K that we filed with the real three or five statements on Mezi was $36.7 million I believe.

Tom Vadnais

Right.

Mark Bacurin - Robert W. Baird

Now this first six months. Correct.

Tom Vadnais

So many people have extrapolated that to about $43 million pre acquisition.

Mark Bacurin - Robert W. Baird

So, I mean is it fair to say that business accelerated since the time it was acquired and the some that the revenues synergies that you are driving?

Sam Paisley

Yeah I mean it's well -- to catch it up back, as we mentioned on the earlier part of the call, the organic growth rate in the combined MeziMedia price run of business year-over-year for the third quarter was 118%. So indeed this is a business that's experiencing some very attractive growth rates. One of the things I think that's important to realize for us is that in this business, it is a challenging business from the standpoint that it's a publishing business that aggregates content using search as well as editorial skills and the monetization is really done in a way that affords monetization through revenue partners like affiliate marketing management services companies as well as search companies as well as displayed media networks.

So, most of the pure players in this business don't have access to all the expertise in each of those revenues channels. And within our company, we can bring the bear all those various strategies. It's also true that, there are some interesting compliments between Mezi and PriceRunner.

PriceRunner was more of the pure content publisher. Mezi is a content publisher that has a great appreciation for SEO capabilities as well as some very unique expertise in paid search. So, combining the two is almost the best of both roads and the other aspect of Mezi that they have done a wonderful job. One has the ability to publish more than one consumer brand, displaying the content in a differentiated way and not having to be focused on a single unique consumer brand.

So, we are very excited about the business and very, I guess bullish on its ability to continue to grow at very attractive rates in comparison to the total company.

Mark Bacurin - Robert W. Baird

And just to confirm, seasonally the fourth quarter, for the entire comparison shopping and I assume this is the case of MeziMedia as well that seasonally fourth quarter is the strongest quarter?

Sam Paisley

Yeah, generally our businesses experience the strongest quarter in the fourth quarter.

Mark Bacurin - Robert W. Baird

Okay great and then I just want to confirm. Sam, I think on answering question earlier. I thought I heard you say, that lead generation in total, I thought you said just under 60% of media revenue.

Sam Paisley

Correct.

Mark Bacurin - Robert W. Baird

Isn't, that the same stat that you said in the first quarter and I think you even filed in 8-K the total…

Sam Paisley

No, we actually said more than 60%, it's also true, that with the consolidation activities that had been ongoing within the company and lead generation we, slightly changed the scope of our definition of lead generation. And I emphasize the word slightly. But, with the consolidation activities we have now crisper definition of what's under the management control of that group. So, what we said in the first quarter was that well over 60% of our media revenues were lead generation oriented. We said on last quarter's call that we were still above 60%. And what we are seeing on the current quarter call for lead generation in total that we are just a tick under 60%.

Operator

Our next question will come from Aaron Kessler with Piper Jaffray.

Aaron Kessler - Piper Jaffray

Hi, guys, couple questions here. I think you said the display part of the media business grew about 40%. It includes kind of the ValueClick media display and kind of lead gen, excluding the promotional base what the growth was there? And then on the FTC investigation, anymore details? Are they looking out for disclosures of the promotions or may be the bandwidth rate or both of those factors? And just following for some of like comparison shopping, is the strength more on the SEO side of that business or is it more bid management? And when do you expect PriceRunner to benefit from the synergies there as well. Thank you.

Sam Paisely

Wow, that's a chart full of questions, question.

Tom Vadnais

How much time do you have Aaron for us to go through this. The FTC one is probably as good a place to start as any on those. And we previously announced what the FTC had requested and that was information regarding traffic in the promotional sector that we are driving traffic to our company owned sites through e-mail. And that continues to be their focus and that's what we are discussing with them and we've given information to them. So, we don't have anything else really we can say on that. On the display growth, I am not sure I understood the question. The 40% year-to-year number is what we did say. What was the question?

Sam Paisely

Yeah. Let me see if I can take that, Tom, can clarify what we indicated on the call. What I mentioned on the call was that our display ad business, and that would exclude what I just characterized as lead generation, grew at a 42% organic growth rate in the third quarter of 2007 against that same quarter in 2006. And I think the other part of your question was, with respect to comparison shopping is the growth being fueled by SEO or SEM capabilities and when will we see those skills applied to PriceRunner from the standpoint of impact on results.

And what I would say on that relative to performance that, what's going on within Mezi is the combination of both SEO and SEM. And as Tom mentioned on the call, we've had some early discussions among the teams about how those skills could be applied to the PriceRunner. But, we still don't have current measurable affects on the revenues of PriceRunner just yet. So, that's something to come.

Aaron Kessler - Piper Jaffray

Great. Thank you.

Operator

Our next question will come from Brian Pitz of Banc of America Securities.

Brian Pitz - Banc of America Securities

Thanks. Regarding the growth in your Affiliate marketing segment, can you tell us if the SEM business you acquired from Mezi is included in that segment? Or was it left in the comparison shopping piece. And if so, can you comment on the organic growth of affiliate marketing for the quarter?

Then second unrelated, you noted a shift more towards display versus lead gen. Can you clarify is that a trend or is it because clients were avoiding the lead gen, because of the FTC? The IB has been saying that pricing is going away from CPM base. Any commentary on that it will be great? Thanks.

Sam Paisely

Okay. Make sure I get all of those questions. Classification of Mezi is entirely in comparison shopping and keep in mind that when we have to deal with segment reporting, it's largely driven by management structure. And so, that kind of rules when it comes to the classification judgment and the clear answer is that Mezi is entirely encompassed in our comparison shopping SEC reporting segment.

The organic growth in affiliate marketing, which is consistent with the classification we have had in that segment pre acquisition of Mezi, was an organic growth rate of 25% in the current quarter. And I would say the shift in display over lead generation is both a kind of a current period rather than maybe a longer term shift in trends in the industry and has something a good deal to do with the specifics about how we are managing between demand that we have for lead generation advertising as apposed to display, particularly in terms of publisher preference. And I would consider that to be somewhat company specific and short-term trend in nature.

Brian Pitz - Banc of America Securities

Great. Thank you.

Operator

Our next question will come from Christa Quarles with Thomas Weisel Partners.

Christa Quarles - Thomas Weisel Partners

Hi. And just first question I guess is on the lead generation side. I think you talked, or I had been estimating I guess, around $235 million for the full year for lead gen and sort of based on what I think you have done year-to-date based on your percentages, let's see, again trying to equilibrate. That would call for a decent tick-up in Q4, clearly, there is seasonality, but I was just wondering if you could, kind of embellish upon what your expectation is in terms of the weakness that you're seeing versus seasonality that we would expect?

And then, the second question I guess I have is on your behavioral targeting side. You know given some of the competitors in the space AOL buying Tacoda and supposedly rumor to be buying [Crego]. Do you feel comfortable with your current technological set? Do you need to expand? Are you starting to feel any competitive pressures in the market as some of these other players expand their offerings? Thanks.

Tom Vadnais

I missed, who was, who this question was from?

Christa Quarles - Thomas Weisel Partners

It's Christa Quarles of Thomas Weisel.

Tom Vadnais

Okay. Well on the lead gen, you were looking for a full year number for lead gen?

Christa Quarles - Thomas Weisel Partners

Yeah I think, based on your comments around its little less than 60%, a little more than 60%, I was estimating about 235 to 240 for the year before, but the decline this quarter was such that I think that maybe too optimistic. But, clearly there is a seasonal uptick that one might expect there in Q4. So, I am just trying to measure the offset between seasonality and the weakness in the business?

Sam Paisley

Without going beyond what we've already disclosed Christa, I will say that if your estimates are that we are in the $235 million to $240 million range for lead generation activities in total within the media segment, you are not to far off. And your conjecture that we are not expecting much of any of the seasonal lift in the fourth quarter contribution out of that business would also be correct.

Christa Quarles - Thomas Weisel Partners

Okay.

Gary Fuges

And Christa, this is Gary. In the preannouncement press release, we actually quantified our expectations for lead generation revenue in the fourth quarter.

Christa Quarles - Thomas Weisel Partners

Okay. So that was the 240 at that?

Gary Fuges

That was $48 million to $49 million in the fourth quarter.

Christa Quarles - Thomas Weisel Partners

Okay, for both promotional and O&O?

Gary Fuges

The total lead generation, correct.

Christa Quarles - Thomas Weisel Partners

Okay. And then on the other side?

Tom Vadnais

Well, the other part on lead generations that we covered on the October 16th call, was making the point that we think that the business has stabilized when we had our announcement of the FTC investigation and looked at our third quarter projections, we said it was stabilizing and now we think it's stabilized. So, that's what we've used to come up with the numbers we've forecasted for the rest of the year. Once the investigation concludes and the new rules of the road hopefully emerge on the FTC in this sector, hopefully we going to do growth mode. But, right now our expectations are flat for this business.

On that technology thing, I mentioned in the opening comments that we've had a patent in behavioral technology for a long time. And we are very comfortable with our technology here stacking up against anybody else in the industry. So that's something we are happy to talk more about, if you want to have a separate conversation, we are happy to go into more detail with you about our technology.

Christa Quarles - Thomas Weisel Partners

Okay. Thanks.

Tom Vadnais

Thank you.

Operator

Eric Martinuzzi with Craig-Hallum, has our next question.

Eric Martinuzzi - Craig-Hallum

Thanks, I just wanted to start with the clarification before I asked my question. Based on the press release it looks like the implied revenue number for Q4 '06, assuming MeziMedia were around would be around a $175 million. Is that correct?

Sam Paisley

Yeah, that's in the ball, that's sits within range, we said 172 --

Tom Vadnais

'06.

Eric Martinuzzi - Craig-Hallum

'06.

Tom Vadnais

Is that what you said was Q4 '06?

Eric Martinuzzi - Craig-Hallum

That's correct.

Tom Vadnais

Yeah.

Eric Martinuzzi - Craig-Hallum

A $174.7 million.

Tom Vadnais

What else as we do a little number checking on that, what was your other question?

Eric Martinuzzi - Craig-Hallum

Well, assuming that number were correct, I was going to take that and bounce it against where we've got it for Q4, I guess the 175 at the high end. So, basically looking flat year-over-year obviously the delta here being the weakness in the promotional lead gen. I'm trying to get at what is the organic growth rate implied in the Q4 guidance. So I'm backing out a number from Q4 '06. What should that number be? Now you've talked about the decline in promotional lead gen. I think it was down $10 million bucks in Q2 and then down another $9 million in Q3. That puts me at about, I don't know, around 12% implied organic growth rate. Is that correct?

Tom Vadnais

Yes. So what you really think, you want the pro forma Q4 '06 number against our Q4 '07 projection, and you are trying to calculate the growth rates on that?

Eric Martinuzzi - Craig-Hallum

Correct.

Tom Vadnais

All right. Well Sam has been looking at these numbers now. Are you ready to respond to that one, Sam?

Sam Paisley

It is flattish, Eric. Yeah, but I know, we have an anniversary of the decline in the promotional lead gen and I'm trying to digest that information as I build my model for 2008.

Tom Vadnais

Yeah that's the wild card; it's the decline in lead gen which we've talked about quite a bit obviously. And, it calculates your model for next year. It's a big variable as when will the lead gen business get back into the growth mode and so on and that your guess is as good as ours on that.

Eric Martinuzzi - Craig-Hallum

Well, I'm actually not forecasting lot of growth there I am assuming its flat and not a big delta from here.

Tom Vadnais

That’s the same assumption we are making.

Eric Martinuzzi - Craig-Hallum

Okay. Alright. Thanks.

Tom Vadnais

Okay.

Eric Martinuzzi - Craig-Hallum

Sorry one more. The buyback, did you do any buyback since the quarter ended?

Tom Vadnais

Since Q3 ended?

Eric Martinuzzi - Craig-Hallum

Yes.

Tom Vadnais

No.

Eric Martinuzzi - Craig-Hallum

Okay thanks.

Operator

Our next question will come from Mark May with Needham & Company.

Mark May - Needham & Company

Thanks. I think most of my questions have been answered. I will ask, let's see I will ask two here. In terms of the guidelines that you may be asked to meet in terms of commercial lead gen. are you already needing what you expect to be these new guidelines and if so when did you make this change over? And the other question is, you talk about the assumption for lead gen to be flat in the fourth quarter, was that business flat in September and October? Thanks.

Tom Vadnais

Yes. September and October was pretty much flat and that's why we have come with a conclusion we think it stabilized at its current level and why we are projecting it to be flat for Q4. So I think you got that one right. Relative to the FTC guidelines, one of the problems here is the guidelines aren’t very clear in this area. So we think and we stated this when we made the announcement of the initial FTC letter we got in May. Maybe announcement that we thought we were in compliance with all of the current regulations and we still would believe we are.

But we acknowledge that there is a lot of ambiguity and exactly what the guidelines are and the positive outcome for this I think for us and everybody in the industry will be more clarity from the FTC on what is permissible and what isn't. So, we are looking forward to getting that resolved and we continue to feel that we are in compliance with the guidelines as we understand them today. Did we get both the questions answered?

Eric Martinuzzi - Craig-Hallum

I think so. It was just based on your commentary in your prepared remarks. It sounded as though, maybe you had gained a little more clarity, in your conversations with the FTC, but it doesn't sound to be that.

Eric Martinuzzi - Craig-Hallum

The clarity that we have gained is we understand better what they are looking at, and we understand the process and, as we have said, we think that, they will probably want to have some sorts of fine for us, when this concludes because they may interpret that we haven't been doing things exactly like they would have liked.

So we don't know, if that's going to happen and so what we said was we thought if there is a fine, it wouldn't be material to our financial condition. And then the other thing, we said is that we will anticipate and this is based on previous FTC investigations they have done that we have heard about. We will anticipate, that there would be some sort of a stipulated injection we would agree to, to on a go forward basis and what we will be agreeing to this, what the new rules of the road are that they established. So that's the only new news really that we have at this point.

Gary Fuges

Thank you. Operator next question please

Operator

We will hear from Chad Bartley with Pacific Crest

Chad Bartley - Pacific Crest

Hi, thanks for taking my question. Sorry if I miss, there is been a lot of question on MeziMedia. I think a quarter ago, you guided to roughly $25 million to $30 million in contribution from Mezi for the five months. It seems like that's a little conservative given the $20 million contribution in two months in Q3. Have you updated what you think Mezi will contribute in those five months total or may be can you just make it easy and tell us what do you think we'll see in Q4 thanks.

Tom Vadnais

Okay. Sam, make it easy.

Sam Paisley

So, on our last quarter's call we said that we expected $25 million to $30 million from Mezi in the current year. We are now thinking that's more or like $45 million to $50 million.

Chad Bartley - Pacific Crest

Okay. Thank you.

Operator

Our next question will come from Sandeep Aggarwal.

Sandeep Aggarwal - Oppenheimer & Co

Sorry for beating the dead horse here, but one question on lead generation. And I want to focus on the non-promotional lead generation. Can you talk about the pricing trends renewal rate for the advertisers and average spend per advertiser? How it has trended since you have been involved in FTC investigation for the promotional-base lead generation?

Sam Paisley

No, I really haven't disclosed those kind of details. I mean, it's obvious from what we've said on the call that there is some spillover effect into lead generation in total. But, we indicated that in the Q&A part here that there was a $9 million quarter-over-quarter sequential decline in the promotional owned and operated sites.

Sandeep Aggarwal - Oppenheimer & Co

Okay. And just one question on the international business: Can you talk about how is your effort to ramp up your international business in Europe and China after the MeziMedia acquisition going on? And especially, if you can throw any color in terms relative strength for any particular segment internationally. Thank you.

Tom Vadnais

Not sure we have growth rates separately…

Sam Paisely

Yes. Sandeep, we will have to get back there in terms of growth rates for international versus US. Those will be in the Q, which we will file in a short amount of time here. But, I don't have the breakout for international versus US. I can tell you that, you may recall when we went for reporting segments those were worldwide product segments. So, we weren't providing US versus international color by business segment. So, we will be able to give you overall US versus overall International in a follow-up call.

Tom Vadnais

I think it is fair to say that the growth rates in Europe are higher by a fair amount in Europe than they are in the US. And the only segment that would accepted there would be comparison shopping and in the US market Mezi performance is really driving that growth.

Sandeep Aggarwal - Oppenheimer & Co

Thank you.

Operator

Our next question will come from Jason Helfstein of CIBC World Markets

Mayuresh Masurekar - CIBC World Markets

Hello this is Mayuresh calling in for Jason. You mentioned a 42% growth rate in the display business 3Q '07 and I was wondering if you could break it out between traffic growth and monetization.

Sam Paisely

Sorry, Mayuresh.

Tom Vadnais

Could you repeat the question?

Mayuresh Masurekar - CIBC World Markets

Sure. You mentioned that the display business grew a 42% in 3Q '07 and we were wondering if you could break it out between traffic growth and monetization.

Sam Paisely

Well, I am not sure what do you mean by monetization price.

Mayuresh Masurekar - CIBC World Markets

Basically pricing.

Sam Paisely

But essentially, I will call it traffic management and utilization as apposed to unit prices.

Tom Vadnais

Volume is up. Impressions are up. If that's what you mean by traffic?

Mayuresh Masurekar - CIBC World Markets

So, most of it came from essentially higher impressions or was there also pricing uptick that you saw during the quarter.

Sam Paisely

What we said about our pricing environment is that prices have generally been slightly increasing. That's being fuelled by acceptance of new product ideas and [demand and] premium, not just behavioral targeting and video. But most of the growth that we are experiencing is largely a function of better utilization of available inventory and therefore the ability to get even higher amounts of inventory from publishers who want to be active in the display business.

Mayuresh Masurekar - CIBC World Markets

Well thanks.

Gary Fuges

Thanks. Operator we have time for two more questions, please.

Operator

Yes. Our next question will come from Robert Coolbrith with ThinkEquity Partners.

Robert Coolbrith - ThinkEquity Partners

Good afternoon, everyone, this is Rob on the call for Bill. Just to revisit lead generation for the moment, it sounds like you've changed your definition slightly of lead gen, and sort of kept a little bit of confusion about the proportional contribution. If you had to give a pro forma number Q1 versus Q3 on apples-to-apples basis, what it would be? And then also just quickly on BT, in terms of your efforts there. Are you moving beyond targeted -- retargeting to selling behavioral segments. And then, finally, if you any comments on when you might or might not be doing that exchanges? Thanks a lot.

Sam Paisely

So, in terms of the lead gen question: I don't want to make too much of the slight re-measurement; with respect to promotionally owned and operated sites: absolutely no change, no change whatsoever. With respect for lead generation activities: overall a very, very slight change. So, it shouldn't really change much of the characterizations of the total numbers and as someone mentioned earlier on the call, lead generation in total at $235 million to $240 million for the full year is materially in the ball park.

With respect to the other questions: in behavioral targeting I'd say the thing that somewhat unique about us, is not only can we comprehend simple kind of remarketing to visitors who have come to particular merchant sites, we have the technology platform that's able to tailor and customize programs for merchants that want us to address their specific needs as opposed to simply reselling consumer profiles on a can or a standardized basis. I can't remember the last.

Tom Vadnais

The other question was on exchange and what we've said before on exchange, if we are observing the exchange model we haven't seen, it get a lot of traction yet as it does, perhaps we'll be a buyer of inventory on exchange. If we think it's a model that really can help us, we can have an exchange up and running based on our own technology in a short period of time. So, we are observing the exchange market but, at this point that's all we have to report on it.

Robert Coolbrith - ThinkEquity Partners

Great, thank you very much.

Tom Vadnais

One last question Gary?

Gary Fuges

I think that was it Tom. Well, I'm sorry, I apologize, no we do have one more.

Operator

Our next question will come from Peter Kuechle with Frontier Capital.

Peter Kuechle - Frontier Capital

Hey guys, just a question on the Q4 guidance in the leverage in the business model. The revenue guidance is for up, revenues about 10% sequentially but the EPS guidance is for flat upon their penny. Can you just talk about why there wouldn't be more earnings leverage in the business model in the fourth quarter?

Tom Vadnais

Well, the guidance that we gave is $0.17 to $0.18.

Peter Kuechle - Frontier Capital

Yeah.

Tom Vadnais

And that's coming off of a $0.17 quarter, so we have a little room in there for growth.

Sam Paisley

Well, the other thing you should take into account is that, as you go throughout the year, the effect of stock option grants and the amortization of related comp expense and the fact that we are now going to have MeziMedia and for full quarter with full amortization expense is part of the mechanics of that fourth quarter calculation. It's also true if you were to calculate the amount of fourth quarter on left, there is far less operating leverage in this fourth quarter because of the modest expectations for lead generation business in the fourth quarter of this year.

Peter Kuechle - Frontier Capital

Great, that's very helpful. Thanks for taking my question.

Tom Vadnais

Thank you. All right, that concludes our call, thank you everybody.

Operator

Thank you for participating in today's ValueClick's third quarter conference call. A replay of today's conference will be available beginning at 4:30 p.m. Pacific Time today by dialing 1-888-203-1112 or 1-719-457-0820. The access code for the replay is 8245264. The replay will be available through 9:59 p.m. Pacific Time on November 8, 2007. Thereafter, a replay can be accessed on ValueClick's website at www.valueclick.com. Thank you for your participation and have a great day.

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